The Mayo Clinic: High quality yes, but low cost?

Policy in Detail

SUMMARY

In today’s health care discussions, the Mayo Clinic is regularly held out as a high value health care provider that delivers high quality at a low cost. There is indeed a strong body of research from Dartmouth Medical School that shows Medicare patients at the Mayo Clinic consistently cost far less and experience superior outcomes when compared to similar patients at clinics across the country.

However, when it comes to understanding value—the intersection between cost and quality—the Dartmouth research is limited by the fact that it covers only Medicare patients. In Medicare, the government sets prices and, as a result, the prices in the Dartmouth data reflect national Medicare policies and do not reflect the price of health care services negotiated between private health plans and providers more generally.

In contrast to the Medicare data, high quality tends to cost more in Minnesota’s private health plans. Evidence shows that the Mayo Clinic is actually a high cost provider when compared to other Minnesota providers. The fact that Mayo actually costs more holds a number of implications for the current health care debate.

Medicare data understate the cost of high-quality health care.

Reforms that attempt to replicate high-quality practices—such as comparative effectiveness research and paying for value—may not automatically result in lower costs.

Quality at “centers of excellence” like the Mayo Clinic would suffer if a majority of Americans were to switch from private health plans to a government-controlled, Medicare-style public plan option.

Measuring, publishing, and understanding the cost of health care are difficult.

Comparative effectiveness research—assessing the relationship between cost and quality, divining what works and what doesn’t—is also very complicated.

Introduction

President Obama regularly cites a handful of health care providers as examples of what a high-value American health care system could look like in the future.[1] The Mayo Clinic in Rochester, Minnesota, is one. In a town hall meeting this summer, President Obama explained how “Mayo provides care much more cheaply than a lot of other health systems, even though it’s better care.”[2]

This statement is largely based on studies from Dartmouth Medical School that show Medicare enrollees tend to cost less and experience better outcomes at Mayo when compared to enrollees using providers in other regions of the country. This research offers invaluable insights on our health care system and rightly holds up the Mayo Clinic as the gold standard among America’s health care providers. Researchers link Mayo’s success to the team (coordinated) approach the clinic’s doctors take and the fact that doctors are paid a salary versus a fee for each service they provide.

However, when it comes to understanding value—the intersection between cost and quality—the Dartmouth research is limited by the fact that it covers only Medicare patients. In Medicare, the government sets prices and, as a result, the prices in the Dartmouth data reflect national Medicare policies and do not reflect the price of health care services negotiated between private health plans and providers more generally.

In contrast to the Medicare data, prices negotiated by Minnesota’s private health plans show that high quality tends to cost more. Relative to other Minnesota providers, most evidence pegs the Mayo Clinic as a high-cost provider. To be clear, the issue here is about the cost side of the value equation, not the quality side. Indeed, the last thing I want to suggest is that the Mayo Clinic does not deserve its reputation as a center of excellence. Also, while the Dartmouth Medicare research is not without controversy, the evidence outlined below does not question its validity. Rather, it adds new data from the private sector with important implications on the national debate over health care reform.

Evidence suggests Mayo is a high cost provider in Minnesota

Earlier this summer, a doctor reminded me that the Mayo Clinic is actually in the bottom tier of every tiered health plan offered in the state of Minnesota, including Blue Cross and Blue Shield of Minnesota’s Blue Precision, HealthPartners Distinctions, Medica’s Patient Choice, and the state’s Minnesota Advantage plan. These tiers are based on cost and quality, but mostly on cost. Consequently, the Mayo system is presumably a high-cost provider relative to other Minnesota providers.

In my own experience with health plans in Minnesota, the Mayo Clinic tends to be out-of-network, suggesting that the Mayo Clinic presents a higher cost to these health plans. Not too long ago, my father was diagnosed with a grade IV brain tumor, and it turned out that the Mayo Clinic was not in network. He had a Honeywell health plan administered by UnitedHealth Group. If the Mayo approach offers so much value, wouldn’t Honeywell want to encourage its most expensive patients to use it?

Last week, Minnesota Community Measurement unveiled a new Web site that provides the most concrete public data on the price of various physician procedures in clinics across Minnesota. Specifically, the Web site provides the average negotiated price from Minnesota’s four largest health plans for 105 procedures offered in a physician’s office. Based on this data, the Mayo Clinic is often the highest cost provider relative to other Minnesota providers.

In the table linked here, I’ve collected some data from the MN Community Measurement that compares the Mayo Clinic’s prices to the low-cost MN provider, high-cost MN provider, and two large health care providers in the Twin Cities, Park Nicollet and HealthEast. I picked these two providers due to their size and because my review of the data showed that Park Nicollet offered a high-cost example and HealthEast offered a low-cost example. The table then ranks Mayo’s prices from highest to lowest price. The final columns show Mayo’s cost as a percent of Health East and Park Nicollet prices. The table does not include all 105 procedures. I limited the table to only procedures where the Mayo Clinic reported and where at least 50 providers reported. With more than 50 providers reporting on each procedure, the ranking and comparison is more meaningful.

Based on the data in the table, Mayo costs far more than other Minnesota providers. Of the 69 procedures, Mayo’s price is the highest for 11 and among the top five highest for 48. On average, Mayo’s price was 220 percent higher than HealthEast and 180 percent higher than Park Nicollet.

A few caveats

None of this necessarily means that the Mayo Clinic is a high-cost health care system in Minnesota. I can think of at least four reasons why Mayo might still be a low- or average-cost provider.

First, Mayo may charge lower prices for hospital services. The Minnesota Community Measurement data represent only the average negotiated price for a sample of physician services. Hospital services represent a larger share of the health spending pie, and Mayo may offer lower hospital pricing. According to the Minnesota Hospital Association’s MinnesotaHospitalPriceCheck.org website, Mayo Clinic’s St. Mary’s Hospital tends to report lower hospital charges than similarly sized hospitals in Minnesota. But, this is the list price—the price on your bill that no one pays—and not the price it negotiates with health plans.

Second, Mayo may need to charge more to private-pay patients to cover shortfalls from uncompensated care and public payers like Medicare and Medicaid. Because public payments rarely cover the cost of care, providers must charge private payers higher rates if they expect to stay in business. At 40 percent of its patients, maybe Mayo has a higher proportion of Medicare patients. Greater Minnesota certainly has a higher proportion of elderly residents. That said, St. Mary’s Hospital and Rochester Methodist Hospital devote lower portions of their operating expenses (1.6 percent and 1.5 percent, respectively) to uncompensated care than the MN average (2.2 percent).[4]

Third, while Mayo might price physician services higher, its patients may use these services less, making Mayo’s overall cost lower. Indeed, Mayo’s integrated approach is said to reduce the number of unnecessary procedures. Though Honeywell never encouraged my family to receive care at Mayo, other companies do, and they claim they save money.[5]

Four, as a brand-new initiative from Minnesota Community Measurement, there may be some glitches in the system. On further review, Minnesota providers may demonstrate some kinks that question the comparability of the data. The fact is, the Minnesota Medical Association expressed serious concerns about the process that led to the new dataset.

Nonetheless, the fact that every tiered health plan in Minnesota places Mayo in the high-cost tier suggests strongly that Mayo’s total cost of care is higher relative to other Minnesota providers. This should not be at all surprising. Mayo’s reputation for excellence gives them a far better bargaining position to negotiate higher prices. Therefore, the weight of the evidence—health plan tiers, health plan networks, and MNHealthScores.org data—indicates that the Mayo Clinic is a high-cost provider in Minnesota.

Implications for national reform efforts

The conclusion that the Mayo Clinic costs more for Minnesotans with private health plans holds a number of implications for the present health care debate.

Medicare data understate the cost of high-quality health care. The Dartmouth dataset shows that, over the last two years of life, a comparable Medicare patient costs $53,432 at Mayo’s St. Mary’s Hospital versus $93,842 at UCLA Medical Center.[6] Many believe that the difference between the two costs is pure waste to the system. But the difference may be due more to the fact that Mayo—not able to negotiate higher rates for higher quality—is getting severely underpaid by Medicare. This is because Medicare prices are fixed and not freely negotiated. Therefore, the Dartmouth research omits a critical component of the value equation—the cost of quality independent of government price fixing. The evidence that Mayo is a high-cost provider in Minnesota suggests that high-quality medical care does come at a higher price when providers are free to negotiate, just like high-quality services in any other industry. Consequently, in a Medicare system that pays Mayo for the true value that it provides, the average patient will likely cost more than $53,432.

Research by Dr. Richard Cooper, a professor at the Wharton School of the University of Pennsylvania, arrives at a similar conclusion. He finds that “more non-Medicare [health care] spending per capita correlates with better quality,” which leads him to conclude that “Medicare spending is a poor proxy for health care spending overall.”[7]

Reforms that attempt to replicate high-quality practices—such as comparative effectiveness research and paying for value—may not automatically result in lower costs. This point follows directly from the first point. If Medicare data understate the cost of high quality care, then replicating the Mayo model may not lead to the oft cited win-win scenario where low costs occur as a natural, automatic by-product of high-quality care.

Quality at “centers of excellence” like the Mayo Clinic would suffer if a majority of Americans were to switch from private health plans to a government-controlled, Medicare-style public plan option. While it’s a mistake to say there’s a free market in health care, some freedom does exist, and Mayo uses that freedom to extract higher payment rates for higher quality. These higher payments (along with the clinic’s healthy endowment from private donations) help keep Mayo’s doors open. If the Mayo Clinic requires higher payments from private payers to keep its doors open, then it stands to reason that it would need to close its doors or change its practices if more patients were to pay through a government-controlled, Medicare-style system. But that’s exactly what the public plan option would do. The Democratic proposal in the U.S. House would create a public plan option that pays only five percent above Medicare rates.

Measuring, publishing, and understanding the cost of health care are difficult. The fact that MNHealthScores.org is a first-of-its-kind Web site is itself a testament to the difficulty in bringing information about the cost of health care to consumers. Anyone publishing cost data must overcome a number of barriers. Many providers don’t want their prices to be public. Health plans—the source of the data—need to be cooperative. Then there are all the caveats that I listed above. Just because the Mayo Clinic might charge 341 percent more for a thyroid test than HealthEast doesn’t necessarily make Mayo a high-cost provider. You have to consider whether Mayo prescribes fewer thyroid tests, whether Mayo treats more patients on government programs, and whether Mayo charges less for other procedures.

Comparative effectiveness research—assessing the relationship between cost and quality, divining what works and what doesn’t—is also very complicated. In a July news conference, President Obama famously (or infamously) used the analogy of the red and blue pill to explain how health reform can reduce wasteful spending.[8] Just pick the blue pill when it costs less and does the same thing. Consider the eye popping disparity in Medicare costs between Mayo and UCLA that I just referenced, and it certainly seems there should be some simple things UCLA could do to be more cost effective without sacrificing quality. But when Mayo is compared to HealthEast or Park Nicollet, the equation gets far more complicated. All of a sudden, there are tradeoffs between quality, cost, risk, convenience, peace of mind, etc.

Health care markets assess value and effectiveness better than government health care programs. Mayo’s higher price tag to private payers in Minnesota represents a bit of comparative effectiveness research itself. In a real-world comparison between Minnesota’s market and Medicare, the market rewards Mayo for delivering high-value health care, while the government program penalizes Mayo. Based on this test, a comparatively more effective health reform will follow a market-based approach.

Conclusion

While I question the Mayo Clinic’s reputation as a low-cost provider, it bears repeating that I in no way intend to question Mayo’s excellence. I can attest to its excellence. The day after my family discovered that my father had a grade IV brain tumor—the same cancer responsible for Sen. Kennedy’s death—we turned to the Mayo Clinic for treatment. It was the best decision we made that whole year. The clinic’s celebrated team approach was evident from the start. Over the months that my family hunkered down in the Marriot across from St. Mary’s, it became clear that everyone’s work—from the cafeteria cashiers to the custodial staff to the nurses to the neurosurgeons—centered on the patient. The Mayo Clinic deserves its reputation for excellence and it should be rewarded for its excellence. Markets in Minnesota appear to do just that.

-- Peter Nelson is an attorney and Policy Fellow at Center of the American Experiment. Center of the American Experiment is a nonpartisan, tax-exempt, public policy and educational institution that brings conservative and free market ideas to bear on the hardest problems facing Minnesota and the nation.